Jones Lang LaSalle
Minutes Show Policy Makers
Thought Rate Moves' End Near
By CAMPION WALSH and BENTON IVES-HALPERIN
April 18, 2006 2:12 p.m.
WASHINGTON -- By late March, most of the Federal Reserve's monetary policy makers thought an end was likely "near" for the credit-tightening cycle begun in mid-2004, and some had concerns about tightening too much, according to Fed meeting minutes released Tuesday.
At their March 27-28 meeting, members of the Federal Open Market Committee discussed, among other things, what they saw as moderate core inflation, a cooling housing market and the possibility that their short-term interest rate hikes could have a lagged effect on the economy.
"Most members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy," according to the FOMC minutes, released after a normal three-week period. (See the text of the minutes.)
To head off inflation, the FOMC last month raised its overnight interest rate target for the 15th straight time since mid-2004, taking it to 4.75%. Financial markets widely expect the FOMC will raise the rate target to 5% at its next meeting, May 10. The outlook for future meetings is far less clear.
The March FOMC meeting was the first presided over by Fed Chairman Ben Bernanke. The decision for another gradual interest rate hike and the language of the accompanying statement suggested little change of direction following Alan Greenspan's tenure.
Yellen Emphasizes Data
Earlier in the day, a top U.S. central banker said that what the Fed does next will be driven by economic data, in an addresses that laid out expectations of solid growth and contained inflation.
Federal Reserve Bank of San Francisco President Janet Yellen said "enough has been done by now that I view decisions about the path of policy going forward as quite data-dependent." She noted that the current stance of monetary policy -- the overnight fed funds target is currently at 4.75% -- is "close to a neutral stance" in terms of its economic impact.
The bank president, who is a voting member of the Federal Open Market Committee, spoke in comments prepared for delivery before a local business group in San Jose, Calif.
The economic outlook outlined in Ms. Yellen's speech was generally positive, predicting sustained economic growth and restrained inflation pressures. But she also noted that her forecast was bounded by a number of risk factors.
Ms. Yellen spoke in advance of the release of the meeting minutes for the March 27-28 FOMC meeting. At that meeting, central bankers indicated a continued preference for more rate tightening. Financial markets believe the Fed will stop hiking rates at 5% at its May 10 meeting, and are looking to the minutes to see how deep policy-makers' desire to raise rates actually was.
In her speech, Ms. Yellen explained that with monetary policy now so closely tied to the economy, she will be on guard to see how incoming statistics jibe with her forecast of economy's expected path. She added it's also important to keep in mind the lagged impact of past rate increases.
Ultimately, "I would not want to prejudge future decisions to raise rates -- or to hold them steady -- but rather I will be highly sensitive to the implications of incoming data for the forecast for economic growth, employment and inflation," she said.
In terms of how events are likely to play out, the growth outlook "is essentially pretty positive," Ms. Yellen said. "The economy appears to be approaching a highly desirable trajectory" and will be "supported by strong productivity growth and continued strength in consumer spending and business investment, especially investment by the vital high-tech sector," she said.
Part of what will bring the economy back to this pace is the Fed's "gradual removal" of monetary policy stimulus, which will be "reinforced" by "a significant moderation in the rate of appreciation of house prices."
Inflation "appears to be well contained at present, and my best guess for the future is that it will remain well contained," Ms. Yellen said. But she added, "there are risks, and I think they are tilted slightly to the upside." Ms. Yellen noted inflation as measured by the core personal consumption expenditures price index, which strips out food and energy costs, now stands "in the upper portion of my comfort zone."
While labor market and energy related factors could exert pressure on the inflation situation, Ms. Yellen added that what are now "well anchored" inflation expectations held by markets reduce that threat.
She added the economy, at the current unemployment rate of 4.7%, "is now operating in the vicinity of "full employment'" and stands a very good chance of remaining at that level of utilization. Ms. Yellen noted that labor compensation, despite some anecdotal indications that suggest otherwise, does not appear to be rising fast enough to suggest the labor market is overheating and creating an inflation problem by itself.
Ms. Yellen said in her speech that one of the big risks to the outlook comes out of the housing market, which could easily surprise with stronger- or weaker-than-expected price gains. But as things now stand, "the early signs of cooling in U.S. housing markets are broadly consistent with the degree of moderation I've envisioned."
Another risk to the outlook results from the still unusually low level of long-term interest rates, which Ms. Yellen admitted remain hard to explain. She noted that while yields on long-dated Treasury bonds have risen of late, "it's too soon to tell" whether that means the market will help restrain economic growth.
The central banker also said energy prices are a risk to the outlook, despite the economy's resilience to gains thus far. "My assumption, based on the forecasts embodied in futures markets, is that energy prices will stabilize around their current levels" and if that proves true, their negative impact on spending should "dissipate" over the current year, which in turn would be a plus for economic growth, she said.
Still, Ms. Yellen cautioned that predicting the direction of energy prices is an effort "fraught with uncertainty." Her comments come at a time where energy markets have been surging, in part due to geopolitical uncertainties, pushing oil futures prices to record highs.
--Michael S. Derby contributed to this article.
Write to Campion Walsh at campion.walsh@dowjones.com and Benton Ives-Halperin at benton.ives-halperin@dowjones.com
Minutes Show Policy Makers
Thought Rate Moves' End Near
By CAMPION WALSH and BENTON IVES-HALPERIN
April 18, 2006 2:12 p.m.
WASHINGTON -- By late March, most of the Federal Reserve's monetary policy makers thought an end was likely "near" for the credit-tightening cycle begun in mid-2004, and some had concerns about tightening too much, according to Fed meeting minutes released Tuesday.
At their March 27-28 meeting, members of the Federal Open Market Committee discussed, among other things, what they saw as moderate core inflation, a cooling housing market and the possibility that their short-term interest rate hikes could have a lagged effect on the economy.
"Most members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy," according to the FOMC minutes, released after a normal three-week period. (See the text of the minutes.)
To head off inflation, the FOMC last month raised its overnight interest rate target for the 15th straight time since mid-2004, taking it to 4.75%. Financial markets widely expect the FOMC will raise the rate target to 5% at its next meeting, May 10. The outlook for future meetings is far less clear.
The March FOMC meeting was the first presided over by Fed Chairman Ben Bernanke. The decision for another gradual interest rate hike and the language of the accompanying statement suggested little change of direction following Alan Greenspan's tenure.
Yellen Emphasizes Data
Earlier in the day, a top U.S. central banker said that what the Fed does next will be driven by economic data, in an addresses that laid out expectations of solid growth and contained inflation.
Federal Reserve Bank of San Francisco President Janet Yellen said "enough has been done by now that I view decisions about the path of policy going forward as quite data-dependent." She noted that the current stance of monetary policy -- the overnight fed funds target is currently at 4.75% -- is "close to a neutral stance" in terms of its economic impact.
The bank president, who is a voting member of the Federal Open Market Committee, spoke in comments prepared for delivery before a local business group in San Jose, Calif.
The economic outlook outlined in Ms. Yellen's speech was generally positive, predicting sustained economic growth and restrained inflation pressures. But she also noted that her forecast was bounded by a number of risk factors.
Ms. Yellen spoke in advance of the release of the meeting minutes for the March 27-28 FOMC meeting. At that meeting, central bankers indicated a continued preference for more rate tightening. Financial markets believe the Fed will stop hiking rates at 5% at its May 10 meeting, and are looking to the minutes to see how deep policy-makers' desire to raise rates actually was.
In her speech, Ms. Yellen explained that with monetary policy now so closely tied to the economy, she will be on guard to see how incoming statistics jibe with her forecast of economy's expected path. She added it's also important to keep in mind the lagged impact of past rate increases.
Ultimately, "I would not want to prejudge future decisions to raise rates -- or to hold them steady -- but rather I will be highly sensitive to the implications of incoming data for the forecast for economic growth, employment and inflation," she said.
In terms of how events are likely to play out, the growth outlook "is essentially pretty positive," Ms. Yellen said. "The economy appears to be approaching a highly desirable trajectory" and will be "supported by strong productivity growth and continued strength in consumer spending and business investment, especially investment by the vital high-tech sector," she said.
Part of what will bring the economy back to this pace is the Fed's "gradual removal" of monetary policy stimulus, which will be "reinforced" by "a significant moderation in the rate of appreciation of house prices."
Inflation "appears to be well contained at present, and my best guess for the future is that it will remain well contained," Ms. Yellen said. But she added, "there are risks, and I think they are tilted slightly to the upside." Ms. Yellen noted inflation as measured by the core personal consumption expenditures price index, which strips out food and energy costs, now stands "in the upper portion of my comfort zone."
While labor market and energy related factors could exert pressure on the inflation situation, Ms. Yellen added that what are now "well anchored" inflation expectations held by markets reduce that threat.
She added the economy, at the current unemployment rate of 4.7%, "is now operating in the vicinity of "full employment'" and stands a very good chance of remaining at that level of utilization. Ms. Yellen noted that labor compensation, despite some anecdotal indications that suggest otherwise, does not appear to be rising fast enough to suggest the labor market is overheating and creating an inflation problem by itself.
Ms. Yellen said in her speech that one of the big risks to the outlook comes out of the housing market, which could easily surprise with stronger- or weaker-than-expected price gains. But as things now stand, "the early signs of cooling in U.S. housing markets are broadly consistent with the degree of moderation I've envisioned."
Another risk to the outlook results from the still unusually low level of long-term interest rates, which Ms. Yellen admitted remain hard to explain. She noted that while yields on long-dated Treasury bonds have risen of late, "it's too soon to tell" whether that means the market will help restrain economic growth.
The central banker also said energy prices are a risk to the outlook, despite the economy's resilience to gains thus far. "My assumption, based on the forecasts embodied in futures markets, is that energy prices will stabilize around their current levels" and if that proves true, their negative impact on spending should "dissipate" over the current year, which in turn would be a plus for economic growth, she said.
Still, Ms. Yellen cautioned that predicting the direction of energy prices is an effort "fraught with uncertainty." Her comments come at a time where energy markets have been surging, in part due to geopolitical uncertainties, pushing oil futures prices to record highs.
--Michael S. Derby contributed to this article.
Write to Campion Walsh at campion.walsh@dowjones.com and Benton Ives-Halperin at benton.ives-halperin@dowjones.com
posted by Jones Lang LaSalle NJ News Blog at 4:25 PM
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